Beware. Small landlords!
Historically, being a landlord could be a lucrative business, especially as a side line or a role in later life.
The idea was quite simple. Buy a few properties on buy to let mortgages, rent them out and use the rental income to repay the mortgages as fast as possible so that by the end of, say, 10 years the mortgages were paid off and the rental income was largely profit. A well managed portfolio could be a very lucrative nest egg.
Right now, a plan like that might not be so attractive.
Changes in stamp duty tax laws mean it’s more expensive to buy additional properties. Changes in income tax laws mean that the rental income is subject to high levels of tax than before. As well as being less financially viable, it can also be more risky.
The law protects tenants. Even those who don’t pay their rent. So you can end up spending money on going through the legal process to evict a tenant and all the while you are paying the mortgage with no rental income. What’s more, with the housing market stagnating, if you do decide to sell a property to ease your cash flow, you are likely to sell for a loss if you can sell at all. Although at least that would mean no CGT!
So being a landlord is not for the faint hearted. However, if you are fully and properly prepared and willing to see it as a long term venture which will have its ups and downs, it is still possible to make money.
With the property market the way it is, there are bargains to be had if you are currently looking to buy, especially if you can move fast and don’t have to sell anything of your own. It also helps if you have good legal advice to guide you around the potential risks. Advice like this!
House of Multiple Occupation (HMOs).
A popular move by landlords is to buy a big property and divide it into bedsits with some shared amenities such as kitchen and bathroom.
What you would get for each individual room can add up to much more than what you’d get for letting the whole property to one family. What’s more it’s easier to find people who want a room rather than families that want (and can afford) a whole house.
It’s more likely that at least a few of the rooms will be let at any one time so you’ve always got some income. Nevertheless, there are risks you should be aware of.
For a start, HMOs are very tightly regulated and you will probably need an HMO licence. You will have greater obligation in terms of things like fire safety and facilities.
Some rooms may be too small to be let under an HMO and some bathroom and kitchen facilities may need to be improved to be compliant. Fire doors may need to be fitted as well as more extensive smoke alarms. If the property you are looking to buy is going to be an HMO, we would strongly recommend that you get an expert in to inspect it, tell you what works (if any) will need to be done before you can have tenants in, and, most importantly, what it’s going to cost you.
If, after purchase, you find that any of the rooms is too small to be let, and a considerable amount of work needs to be done to the rest of the property to be compliant, it can have a considerable effect on your budget.
Whilst you may decide not to let your property as an HMO, your tenant may have other ideas. There have been a number of reported cases of tenants taking Assured Shorthold Tenancies over family properties, and then dividing them up into small rooms, and subletting them to make a profit.
As we’ve mentioned above, what you get for all of the rooms combined can be more than you’d get for letting the whole house. This is especially true if your tenant doesn’t go through all of the legal requirements to get an HMO licence and be compliant.
People who illegally sublet are not normally worried about following the rules. You may take the view that you don’t care, so long as your rent is being paid, but we’d suggest that you should care. If the council become aware that your property is being used as an HMO, they will come after you, not your tenant.
It will then become your responsibility to either remove the subtenants or make the property compliant to avoid prosecution. Our advice is to make sure someone checks on the property on a regular basis and makes sure that the occupiers are not doing anything illegal on site.
Evicting a Tenant.
As we’ve mentioned above, if you want to get a tenant out, for any reason, you will need to get a court order having gone through the correct process first.
This includes serving notice on the tenant, giving them the requisite notice (usually two months) and if the tenant doesn’t leave, court proceedings will need to be issued and served.
You will then need to wait for the tenant to reply, and assuming they don’t have a good defence, you will be given an eviction order.
If the tenant still doesn’t move out, you will need to appoint a bailiff to attend at the property and physically remove them. This process can often take a couple of months, and if in the meantime the tenant is not paying his rent, you are left paying the mortgage in the meantime.
You can claim your losses from the tenant (including rent arrears and legal costs) but this only has a value if the tenant has assets/income and you can find him to enforce those claims. Whilst there isn’t much we can do to help you speed up the process, there are still a few steps we would advise you to take.
- First, make sure you have references taken out on your tenants.
- Secondly, find out where they work and what they do for a living – if you want to pursue them for arrears at a later stage, this could be valuable information.
- Finally, if a tenant is in arrears, act quickly. The sooner you start chasing them for the arrears, and take action if they still don’t pay, the sooner a bad payer will be removed from your property and you can re-let to someone who will pay.
Keep the property in good repair.
Whilst there can be very few grounds on which a tenant can refuse to pay his rent, disrepair will justify such action. What’s more, if that is their reason for not paying, you will not be able to evict them until the repairs have been done. So make sure that the property is in good condition when it’s let, and if your tenant does tell you about any problems, make sure you get a professional around to fix it as soon as possible.
Finally, and possibly most importantly, make sure you have some reserve cash. Things will go wrong unexpectedly such as tenants leaving and properties being empty for longer than you’d expected. If you are over stretched, it’s more likely that you’ll have to sell a property at a loss, which will have a knock on effect on your overall plan.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.